Legality of MCA’s Notification on Annual KYC of Directors

Is MCA’s Notification for Annual KYC of Directors Rational and Legal?

Now that the time for filing DIR-3 KYC has just go over on September 15^th for those directors who were already on record as on March 31^st 2018, its time to critically review MCA’s notification inserting Rule 12A in the The Companies ( Appointment and Qualification of Directors) Rules, 2014 requiring every Director to file a form DIR3-KYC every year by April 30^th. Reason given on the website is that it is part of updating its registry. This article will examine the rationale for the exercise and whether the desired objective could have been achieved in a better way.

Requirement of obtaining DIN

Section 154 of the Act requires every person who wishes to be appointed as a director in a company to obtain a Director Identification Number (DIN) before he can be appointed as a director.  DIN has to be quoted by the director or the company while furnishing any return, information or particulars as are required to be furnished under this Act.  As all returns are online, DIN will be indicated in the online form.

Requirements to keep the information upto date and impediments

Once obtained, the information is required to be kept upto date by informing MCA of any change in the information furnished by the Director filing the information of the change through Form DIR-6 within 30 days of the change ( Rule 12 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 Therefore there is already a mechanism to keep the data base upto date. However there are certain impediments why this is not happening.

First, is the requirement to append supporting documents of the proof of the change. If a person has changed his address and desires to inform MCA of the change, so that he can receive any communication, he is required to file the proof. The logic for requiring proof should be examined as an address is only a place where service of a notice would be considered valid against the director.

Secondly,  requirement that DIR-6 should be uploaded under the DSC of the director. DSC has to be obtained at a cost. Directors who interact with the MCA and who file returns on MCA website require DSC. For other Directors the DSC serves little or no purpose. The return could be filed through a professional under his DSC who attests to the change after verifying the documents supporting the request for the change.

 In this backdrop  MCA will find that its database of directors is out of date . Therefore MCA should find easier methods to obtain information of the change and to keep its data base upto date.

It Is A Director Identification Number And Not Director Location Number Or Director Communication Number

While we do understand that the data base needs to be updated on a regular basis, the requirement of annual updation of KYC is strange. A director’s name, father’s name, date of birth, PAN and Aadhaar are permanent data and not subject to change. Similarly personal mobile, email, passport and nationality though not permanent do not change frequently. The only information which could change for many is the address.. Photo of course would require periodic update (say once in 5 years). MCA has already prescribed a form DIR 6 for updation of particulars on the MCA website which is to be done within 30 days of the change. Said updation is without fee. Hence this requirement for updation on annual basis is quite inexplicable.  Further issuing the notification in July and expecting compliance by August 31^st 2018( extended upto September 15^th )  is unreasonable. Third, the information asked for in Form KYC-3 is the permanent address and present address. Not the address where the director could be expected to be found when the police come with the arrest warrant! So how is keeping the information upto date going to help?

Service to registered office of the company is a valid service on a director

Under Section 20 the Service of a notice on the Registered Office of the company is a valid service on the company and any of its officers which includes a director. Hence a Director’s latest postal address is not necessary.

Service by electronic transmission to the email  provided by the director  is also a valid service.:

Under Rule 35 of the Companies ( Incorporation) Rules, 2014 there is a valid service of notice  if

 “(a) delivered by –

(i) facsimile telecommunication or electronic mail when directed to the facsimile number or electronic mail address, respectively, which the company or the officer has provided from time to time for sending communications to the company or the officer respectively;

(ii) posting of an electronic message board or network that the company or the officer has designated for such communications, and which transmission shall be validly delivered upon the posting; or

(iii) other means of electronic communication, in respect of which the company or the officer has put in place reasonable systems to verify that the sender is the person purporting to send the transmission; and

(b) that creates a record that is capable of retention, retrieval and review, and which may thereafter be rendered into clearly legible tangible form.”

Many Directors (especially those who are senior citizens) may not be having their own email and prefer communications go to the company email or a trusted person’s email for faster response. Requiring through DIR-3 KYC each director to possess his own email or and mobile number would not serve the intended purpose.

However DIR KYC-3 asks for the email and mobile number of the director. Not the email or mobile number to which communications may be sent to be a valid service The forms should capture the email and mobile number to which communications may be sent for the service to be considered a valid service.

Can Rules Impose A Requirement Not In The Act

 DIR-3-KYC can only be filed if Director has

• DSC
• His own mobile number (his own mobile SIM)
• His own email ID

The above three are not requirements under the Act as a necessary pre-requisite for a person to become a director. Insisting that every director obtain a DSC is also adding to the compliance costs. Many directors use the services of others for affixing their signatures by DSC or verifying email. It may so happens that a director may not be having his own mobile. Even if he is, he may not be in the habit of looking at SMSs and emails because of a lot of junk messages and mails. Further the DSC can be used for electronically signing other documents without the knowledge of the director. It is common knowledge that DSCs are presently lying in the offices of compliance professionals and being used to authenticate returns under various Acts. At some time the vary basis of DSCs establishing that the director has affixed his sign on the document would require further attestation putting the entire usage of DSC as evidence of signing in jeopardy. Forcing directors to have their own DSC, mobiles and email id by this notification would require review and  the legality of the present notification may be examined in respect of the above 3 requirements.

Process Betrays MCA’s Discomfort with Technology!

It is not  funny that the MCA does not trust its own System. Why require directors to sign under his own DSC purchased at a cost if the documents uploaded are to be certified by a CA, CS or Cost Accountants. Why require a professional to certify the documents, if the documents are uploaded under a directors own DSC. A DSC is supposed to be issued by a Certifying Authority after satisfying itself about the identity and address of the signatory. Therefore either require certification under Director’s own DSC or let the particulars be certified by a practicing professional. Not both.

Consequences of Failure to File DIR-3 KYC

MCA through the notification is stating that it will deactivate the DIN of the directors who do not file their DIR-3-KYC by August 31^st 2018 ( since extended September 15^th). What is the consequence there of is not clear.  The Act only requires a Director to have unique DIN not an active DIN. Therefore such person doesn’t cease to be a director on deactivation of the DIN. DIN is required to be indicated in all forms and documents   filed by the Director or company. If the Director is not filing any forms on behalf of a company he doesn’t require an active DIN. There could be individuals who are not directors in any company but possessing DIN. Even in those cases the “deactivation” should not have any impact. However there could be problems in filing certain returns such as the Annual Returns of companies where a Director whose DIN is deactivated is a Director, if particulars of the director are required to be entered in the return.

 Possible Solutions to Keeping the Records Upto Date 

If MCA wants to keep its data base upto date or update on an annual basis, I would suggest a request go in the month of December to all the registered Directors on their mobile and email to visit the website of MCA and confirm their profile by January 31^st  of the following year. ICAI used to send every year a statement to its member of the information held on record and invite corrections if any. Those Directors who do not respond are presumed to have invalid particulars and could be asked to file DIR-3 KYC by April 30^th . Such of those Directors who do not have a DSC could filed the forms under the certification of a practicing professional.

Alternatively this updation could also  easily be done once in a year by linking MGT 7 (Annual Return) being filed by companies every year. Every company is required to file annual return and if not filed for 3 years consecutively, a company becomes inactive. However directors of such companies which do not file MGT-7 for any one year with  reasonable delay, say December 31^st   would need to confirm that they are around by February 28^th  of the following year!.

DIR-3 KYC Could Be the Corporate Mantralaya’s Employment Guarantee Programme!

One of the questions which would have been on any Indian’s mind when MCA announced its flagship MCA 2000 was what would the staff be doing when the Ministry is fully computerised. Now we know. They will be busy updating the KYC every year of all the Directors on the data base and perhaps even verifying the KYC of earlier years!  Obviously this unwanted exercise is nothing but a kneejerk reaction to recent disappearance of few directors of companies and a poor solution.